opinion What happens when nations cut taxes for their richest citizens?
Economists Thomas Piketty and Emmanuel Saez, two of the world's most respected authorities on the incomes of rich people, have a straightforward answer: In nations that slash tax rates on high incomes, the rich significantly increase their...
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2012-08-13 14:19:02

What happens when nations cut taxes for their richest citizens?

Economists Thomas Piketty and Emmanuel Saez, two of the world's most respected authorities on the incomes of rich people, have a straightforward answer: In nations that slash tax rates on high incomes, the rich significantly increase their share of national income.

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Here in the United States, for instance, the tax rate on income over $400,000 has dropped by half, from 70 to 35 percent, since the 1970s. Over that same span, the households that comprise the "1 percent" have over doubled their share of the national income, to 20 percent.

In many European nations and Japan, by contrast, tax rates on the rich didn't fall as fast or as far. And rich people's slice of the income pie increased "only modestly," note Piketty and Saez in a new analysis they co-authored with researcher Stefanie Stantcheva.

This phenomenon doesn't trouble conservatives. High taxes on rich people, they claim, do terrible economic damage by discouraging the entrepreneurship that makes economies strong. Lower taxes on the rich, this argument continues, encourage entrepreneurs, who invest and create jobs when lower taxes let them keep more of the income they take in.

Yes, conservatives freely admit, the rich can and do amass plenty of money in a low-tax environment. They'll even increase their share of national income. But the rest of us shouldn't worry. Thanks to the rich, right-wingers argue, we all benefit from a bigger and better economy.

Piketty and his colleagues put these claims to the test. If the conservative argument reflected reality, they point out, nations that sharply cut tax rates on the rich should experience much higher economic growth rates than nations that don't.

In fact, the three economists note, reality tells no such story. Nations that have "made large cuts in top tax rates, such as the United Kingdom or the United States," they explain, "have not grown significantly faster than countries that did not, such as Germany or Denmark."

So what's going on in countries where the rich all of sudden face substantially smaller tax bills?

In countries that go soft on taxing the rich, top business executives don't suddenly - and magically - become more entrepreneurial, more "productive." Instead, they suddenly find themselves with a huge incentive to game the system, to squeeze out of their enterprises every bit of personal profit their power enables.

The more these executives can squeeze, the more they can keep. The result? The 1 percent in nations that cut taxes on high incomes proceed, as Piketty and his fellow authors put it, to "grab at the expense of the remaining 99 percent."

How can we start discouraging these sorts of behaviors? Piketty and his fellow analysts have a suggestion: raise taxes on America's highest-income bracket. Raise them as high as 83 percent.

This suggestion, the three scholars acknowledge, may right now seem politically "unthinkable." But back between the 1940s and the 1970s, they remind us, the notion that we ought to raise taxes on the rich to reduce the incentive for outrageous behavior rated as our conventional wisdom.

In those years, policymakers - and the public at large - felt strongly that pay increases for the wealthiest Americans reflected "mostly greed or other socially wasteful activities rather than productive work effort."

Is this mid-20th century perception about pay at the top now about to make a comeback? Piketty and friends certainly think so. Let's hope they have that one right, too.

SAM PIZZIGATI edits Too Much, the online weekly on excess and inequality published by the Institute for Policy Studies.